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CHAPTER 7 – Liquidation Under the Bankruptcy Code

Goal of Chapter 7   Josh put in the bullet point

CHAPTER 7 - Liquidation Under the Bankruptcy CodeThe goal of Chapter 7 bankruptcies is to allow the debtor to discharge existing debts and give the debtor a fresh start. The Debtor is allowed to keep certain exempt assets.  Exempt assets are those usually used for the debtor’s support and maintenance, such as clothing, furniture, household, goods, etc. There are two different types of exemptions in California, one that is mainly used by homeowners looking to protect significant equity in their homes or other personal property such as cars; and the other is used by non-homeowners or homeowners without significant equity in their homes or other items such as cars.  After the case is filed, a bankruptcy trustee is appointed.  Although in many Chapter 7 bankruptcies there are no non-exempt debts, Debtors should be aware that the bankruptcy trustee will gather and sell nonexempt assets and uses the proceeds to pay holders of creditors in accordance with the Bankruptcy Code.

Eligibility

To qualify for relief under chapter 7, the debtor may be an individual, a partnership, or a corporation or other business entity.  Subject to the means test described below for individual debtors, relief is available under Chapter 7 irrespective of the amount of the debtor’s debts or whether the debtor is solvent or insolvent. An individual debtor must within 180 days before filing received credit counseling from an approved credit counseling agency.  There are a few exceptions to the pre-filing credit counseling rule in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. However, emergency situations are very specific and limited.

One of the primary purposes of bankruptcy is to discharge certain debts to give the individual debtor a “fresh start.” The debtor has no liability for discharged debts. In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

The Means Test: :  If the individual debtor can show the court that the income for the debtor’s household does not exceed the median income for a household of the same size in the state in which the debtor resides, the debtor will qualify for Chapter 7.  To determine income, the court looks at the debtor’s average monthly income over the 6 months leading up to when the debtor files the case.

if the debtor’s income exceeds the median income figure, the debtor may still qualify if the debtor can pass the Means Test.  The debtor’s gross monthly income is adjusted by removing certain allowed deductions for living expenses, the remainder of which is deemed the debtor’s disposable monthly income.  If the debtor’s monthly disposable income is negligible, then the debtor will be deemed to have no funds to repay creditors, and the debtor will qualify for Chapter 7.

  • How Chapter 7 Works

A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets.  In addition to the petition, the debtor must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases.

Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case, including tax returns for prior years that had not been filed when the case began.

As discussed above, Individual debtors with primarily consumer debts must also file  a certificate of credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A married couple may file a joint petition or individual petitions.  Married couples filing jointly are subject to all the document filing requirements of individual debtors.

The bankruptcy courts must charge a $245 case filing fee, a $46 miscellaneous administrative fee, and a $15 trustee surcharge for a total of $306. Normally, the fees must be paid to the clerk of the court upon filing. With the court’s permission, however, individual debtors may pay in installments, limited to no more than four with the final installment no later than 120 days after filing the petition. If a joint petition is filed, only one filing fee, one administrative fee, and one trustee surcharge are charged.  Failure to pay these fees may result in dismissal of the case.

If the debtor’s income is less than 150% of the poverty level (as defined in the Bankruptcy Code), and the debtor is unable to pay the chapter 7 fees even in installments, the court may waive the requirement that the fees be paid.

In order to complete the petition, statement of financial affairs, and schedules, the debtor must provide the following information:

  1. A list of all creditors and the amount and nature of their claims;
  2. The source, amount, and frequency of the debtor’s income;
  3. A list of all of the debtor’s property; and
  4. A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee and creditors can evaluate the household’s financial position.

Among the schedules that an individual debtor will file is a schedule of “exempt” property.  The Bankruptcy Code allows an individual debtor to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the debtor’s home state.  The debtor should consult an attorney to determine the exemptions available in the state where the debtor lives.

 

The Automatic Stay

Filing a petition under chapter 7 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property.  As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Meeting of Creditors

Between 21 and 40 days after the petition is filed, the case trustee will hold a meeting of creditors.  During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor’s financial affairs and property.  If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions.

It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The Bankruptcy Code requires the trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information.

Role of the Case Trustee

When a chapter 7 petition is filed, the U.S. trustee appoints an impartial case trustee to administer the case and liquidate the debtor’s nonexempt assets.  If all the debtor’s assets are exempt or subject to valid liens, the trustee will normally file a “no asset” report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors are no asset cases.

If the case appears to be an “asset” case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors.

In the typical no asset chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution.

The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor’s nonexempt assets in a manner that maximizes the return to the debtor’s unsecured creditors. The trustee accomplishes this by selling the debtor’s property if it is free and clear of liens (as long as the property is not exempt).

The Chapter 7 Discharge

A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, debtors should consult competent legal counsel before filing to discuss the scope of the discharge.   In most cases, the bankruptcy court will issue a discharge order  – generally, 60 to 90 days after the date first set for the meeting of creditors.

The grounds for denying an individual debtor a discharge in a chapter 7 case are narrow/ Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or failed to complete an approved instructional course concerning financial management.

Secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property (such as an automobile), he or she may decide to “reaffirm” the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as the debtor continues to pay the debt.  If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered. The debtor must sign a written reaffirmation agreement and file it with the court.

An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy case. A creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt.

Certain Debts not Discharged in Chapter 7.

Debts not discharged include debts for alimony and child support, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders. . The debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 case.